Point of no return: Interest on T-bills hits zero
NEW YORK – Investors are so nervous they're willing to accept the same return from government debt that they'd get from burying money in a coffee can — zero.
The Treasury Department said Tuesday it had sold $30 billion in four-week bills at an interest rate of zero percent, the first time that's happened since the government began issuing the notes in 2001.
And when investors traded their T-bills with each other, the yield sometimes went negative. That's how extreme the market anxiety is: Some are willing to give up a little of their money just to park it in a relatively safe place.
There's good news in all this for taxpayers: Low interest rates on government debt mean the United States is financing its $700 billion bailout of the financial system very cheaply. The Treasury has sold mountains of debt to pay for it.
But the trend also underlines stubborn anxiety in the financial market that could keep the economy sluggish for years to come, and it translates into stagnant returns for people who have their money in places like money market funds.
"There's a price for safety," said Peter Crane, president of money market mutual fund information company Crane Data LLC. "Down slightly is the new up."
Earning zero percent on an investment for a short while may not seem that dire for the average person. But a zero percent rate has serious consequences for the complex credit markets.
http://news.yahoo.com/s/ap/20081209/ap_on_bi_ge/meltdown_treasurys
Negative Real Rates Will Drive Gold Prices Up
Real rates are the returns realized by bond investors after inflation is subtracted out. If you earn 5% in Treasuries, and inflation is running 3%, then you earn a 2% real return. Much of the 1.05x growth in your nominal capital is eroded by the relentless loss of purchasing power in the dollar. What you could buy last year for $1.00 now costs $1.03, so in terms of real goods and services you aren’t advancing as fast.
Normally real rates are positive. For putting their hard-earned capital at risk, debt investors deserve to earn a real purchasing-power return after inflation for their efforts. Even though they don’t accept much risk compared to stock investors, they still need to be fairly compensated for this risk. If they are not, they will invest less over the long term because it is pointless to risk scarce capital for a guaranteed loss.
Would you loan money to anyone if you knew you would take a real loss for doing so? Not if you are rational. When nominal interest rates are forced so low by central banks that real returns plunge negative, debt investing becomes a losing proposition. In such a hostile environment, debt investors gradually turn to gold. While bonds guarantee them a real loss, gold will at least keep pace with inflation to preserve the purchasing power of their capital.
To understand the interaction between real rates and gold, you really have to take the long view. Since it takes years for investors to perceive the impact of inflation and change their behavior accordingly, gold doesn’t react overnight. But eventually it does react, and this is very clear over a long-enough time slice. The longer real bond returns are poor or negative, the more capital gradually takes refuge in gold.
http://seekingalpha.com/article/109529-negative-real-rates-will-drive-gold-prices-up?source=email
Obama Policy Good For Gold
Fresh evidence today of continuing U.S. monetary perfidy as Obama announces plans to build a better nest while continuing to hack at the tree in which it resides. How else to parody the incredibly mindless strategy of plunging the nation more severely into debt on what is arguably the brink of its own foreclosure?
As usual, mainstream media/perception management foils interpret the news as positive, and the industrials rally in applause. John Maynard Keynes is heard shouting his approval from the grave.
As of November 19, 2008, the total U.S. debt stood at $10.6 trillion, or $37,316 per person.
Bailout-mania and now infrastructure-mania will no doubt add significantly to that figure. While no dollar figure has been stipulated with Obama’s infrastructure development plan, his identification of “roads, bridges, internet broadband, schools, health and energy” as target segments represents the largest infrastructure investment in the United States since the 1950’s.
So how does this affect the upward pressure still building on gold? Well, besides the many reasons expressed on this web site on a daily basis, the continuation of the policy debasing the currency through endless printing diminishes the amount of gold that currency can purchase, and so the dollar value of gold expressed in that currency increases. At least, that’s what happens if there is no tampering with the price of gold.
The idea of suppression of the gold price as a mechanism of fiscal and monetary policy by the United States government continues to gain acceptance in the mainstream, as evidenced by articles published recently in the New York Post and New York Times.
Disregard the spot price as quoted by COMEX for a moment. Demand for physical delivery from futures contracts traders has risen from a traditional average of 1% to over 16% last Friday, and the price of gold for delivery in the future is cheaper than the spot price is now – a situation known as backwardation, and indicative of traders preferring retaining gold in favor of a paper profit. It is symptomatic of a confidence crisis building in the ability of COMEX to continue to deliver physical gold.
If COMEX does end up in default, the suppressive influences will be severely encumbered, if not completely overthrown, and the result may be the breakout of gold that has long been anticipated by contrarian writers.
http://www.midasletter.com/commentary/081209_Obama-policy-good-for-gold.php
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